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Daniel Sandler
Faculty at Law
University of Western Ontario
London, Canada
CAPCO programs are, in my view, a waste of limited state resources and, in fact, may do more harm than good in developing a regional venture capital industry.
The CAPCO program is fatally flawed in this respect. The investors in the program do not put money at risk in venture capital investments. They are secured creditors making a good rate of return on their investment.
The significant up-front incentive reduces the pressure on the fund manager to invest the capital in qualified investments while the pacing requirements with accompanying penalties may lead to last-minute, hasty investment decisions. Under neither program is the fund manager subject to appropriate pressure from the funds investors to undertake the degree of due diligence or the extent of monitoring expected in private sector VCFs.
CAPCOs are structured differently from LSVCCs, although they share certain key features that likely produce the same crowding out effect. In particular, both programs require up-front investment by qualified investors in order to obtain a tax credit and then impose pacing requirements on the CAPCO or LSVCC.
In my view, these programs are a recipe for disaster rather than a catalyst for growth.